In the media and in conversation, there is a belief by some that asset inflation, especially in equities, is very likely to continue and supported by accommodating monetary and fiscal policy.

Thursday, October 23, 2014

- I do concur that asset inflation is in our future, per charts that depict the credit cycle, a cycle evident in T-Bill prices over many years.

- However, I perceive it is a matter of timing, with more disinflation and perhaps outright deflation between now and the beginning of a persistent inflationary trend

- Why do I say such? Answer: With all the trillions that have recently been poured into the global economies through various fiscal and monetary schemes, inflation has been most notable in equities and junk bonds, risk-on assets that have been juiced with cheap money.

- This has been embraced with grand enthusiasm by willing market participants lacking alternatives as well as corporations borrowing to pursue buy-backs

- However, inflation sensitive assets, such as Gold that spiked at the crest of inflation in 1980, are in a bear market as evidenced by many commodities indices, not inflationary

- Chartwise, the US Dollar Index (DXY) is in a bull market, which really began in May 2011 and I believe is bearish for both commodities and equities over time, not inflationary

- With US GDP languishing, real unemployment much higher than reported due to lower participation rates, stagnant productivity, stagnant household income and a decline in the velocity of money, these conditions do not reflect inflation but speaks to strong disinflation and outright deflation in some assets

- In reality, the results to reflate and reinvigorate the US economy appear to have been minimal so far, except for increasing debt….have you seen the US Debt Clock recently?

- Assuming increased global weakness, I perceive that as debts, which are globally dominated in US Dollars, are written down or off, those dollars will disappear thereby reducing the money supply (deflationary)

- The remaining debtors will be fighting for fewer dollars to repay those debts, thus this should keep upward pressure on the US Dollar, along with a low money velocity due to the economic uncertainty

- For those who argue that more QE is the answer and will inflate away our economic problems, we have only to look to Japan, where the QE term was coined and the results speak for themselves

- Deflation in Japan is still an issue after so many years of anti-deflationary policies

- Evidentially, the recent long Nikkei and short Yen trade made select traders a great sum but has ended abruptly and perhaps limiting the lifespan of “Abenomics” and its promoter’s political career

- Given current and past global economic experiences, will more QE or other “accommodating” fiscal and monetary policies cause additional equity asset inflation?

- It is indeed possible but long term, likely improbable due to diminishing returns and the eventual toxic impact of excessive debt on governments, businesses and households

- The potential good news is that if global economic weakness persists and the equity bubble pops, this should promote free market adjustments in equity valuations along with reallocation of resources to the most productive enterprises, as well as debt and capacity reduction in governments and businesses

- After the credit cycle has bottomed, then inflation should slowly begin in earnest and trend up along with a new secular bull market in equities and in due time, commodities

- Just my opinion as an observer of economic history , human behavior and markets from a global macro technical perspective